House Rent Allowance (HRA) is the part of salary an employer pays towards an employee’s rent. Under the old tax regime, part or all of it can be tax-free if the employee actually pays rent. From 1 April 2026 the rule sits in the new Income-tax Act, 2025 and the Income-tax Rules, 2026 — the formula is the same, but more cities now qualify for the higher limit.
The HRA exemption formula
The exempt HRA for the year is the lowest of these three amounts:
- The HRA actually received from the employer.
- 50% of salary if the rented home is in one of the eight cities below, or 40% of salary anywhere else.
- Rent actually paid minus 10% of salary.
Whatever HRA is left over after the exemption is added to taxable salary. Here, “salary” means Basic + Dearness Allowance (where DA counts for retirement benefits) + commission paid as a fixed percentage of turnover — not the full gross pay.
Which cities get 50%?
| Tax year | 50% of salary | 40% of salary |
|---|---|---|
| Up to 2025-26 | Delhi, Mumbai, Kolkata, Chennai | All other places |
| From 2026-27 | Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, Ahmedabad | All other places |
Worked example
An employee in Bengaluru has Basic + DA of ₹50,000 a month, receives HRA of ₹25,000 a month and pays rent of ₹28,000 a month. For the year:
| Condition | 2025-26 (40%) | 2026-27 (50%) |
|---|---|---|
| HRA received (₹25,000 × 12) | ₹3,00,000 | ₹3,00,000 |
| 40% / 50% of salary (₹6,00,000) | ₹2,40,000 | ₹3,00,000 |
| Rent paid (₹3,36,000) − 10% of salary (₹60,000) | ₹2,76,000 | ₹2,76,000 |
| Exempt HRA (lowest) | ₹2,40,000 | ₹2,76,000 |
| Taxable HRA | ₹60,000 | ₹24,000 |
Because Bengaluru moved to the 50% limit, ₹36,000 more of the same HRA is tax-free in 2026-27.
HRA exemption calculator
What employees need to give their employer
- Rent details — the monthly rent, the rented address and the period.
- Rent receipts or the rent agreement — as the employer asks for them.
- Landlord’s PAN — if the rent is more than ₹1 lakh for the year.
- Relationship with the landlord — the Income-tax Rules, 2026 also ask for this to be disclosed.
Paying rent to a parent can still qualify if the rent is genuinely paid and the parent reports it as income; paying rent to a spouse is generally not accepted.
Old regime or new regime?
HRA exemption, like most exemptions, is available only under the old regime. Employees choose their regime each year, so payroll should know each person’s choice before working out monthly TDS.
In SetuWork, HRA is simply one of your salary heads — a fixed amount, or a formula such as “40% of Basic” — so it appears correctly on every payslip and in the salary sheet. See payroll software, or make a single payslip with the free payslip generator.
Sources
- KPMG — Income-tax Rules, 2026 notified (HRA city list, other allowances)
- ClearTax — House Rent Allowance: exemption, calculation and rules
- Income Tax Department of India
This guide is general information to help HR and payroll teams, not legal or tax advice. Rules change and can depend on your circumstances — confirm with the official source or your consultant before acting on it.